Registered Disability Savings Plan (RDSP)

The RDSP is intended to encourage saving for the long- term financial security of a person eligible for the disability tax credit. An RDSP may be set up by the disabled person, a parent or a legal representative. Once it has been set up, anyone can contribute to the plan for the benefit of the beneficiary up to a lifetime maximum of $200,000 per beneficiary. There is no annual limit. Contributions may be made until the end of the year the beneficiary attains
59 years of age.

Grants and bonds available

RDSP contributions qualify for a Canada Disability Savings Grant (CDSG) at matching rates of 100%, 200% or 300%, depending on family net income and the amount contributed, subject to a lifetime limit of $70,000. An RDSP will be eligible to receive a CDSG until the end of the year in which the beneficiary reaches 49 years of age. In addition, a Canada Disability Savings Bond (CDSB) of up to $1,000 is paid annually to the RDSPs of low- and modest-income beneficiaries and families (subject to a lifetime limit of $20,000).

In recognition of the fact that families of children with disabilities may not be able to contribute regularly to their plans, the rules provide for a 10-year carry-forward of CDSG and CDSB entitlements. Upon opening an RDSP, CDSB entitlements will be determined and paid into the plan for the preceding 10 years,32 based on the beneficiary’s family income in those years. CDSGs will be paid on unused entitlements, up to an annual maximum of $10,500.

Under previous rules, when an amount was withdrawn from an RDSP, all the CDSGs and CDSBs (and related investment income) paid into the RDSP in the preceding 10 years had to be repaid to the government (subject to certain exceptions). There is now a proportional repayment rule that applies when a withdrawal is made from an RDSP in 2014 or later. For every $1 withdrawn from an RDSP, $3 of any CDSGs or CDSBs paid into the plan in the 10 years preceding the withdrawal must be repaid, up to the maximum of the assistance holdback amount—which is generally defined as the total amount of bonds and grants paid into an RDSP within a particular 10-year period.

Example: Jane opens an RDSP in 2009 and contributes $1,500 to her plan annually, attracting the maximum amount of CDSGs ($3,500) each year. In 2015, the assistance holdback amount for her plan is $24,500. In 2015, Jane withdraws $600 from her RDSP. Under the 10-year repayment rule, the entire assistance holdback amount ($24,500) would have to be repaid. Under the proportional repayment rule, only $1,800 of the assistance holdback amount has to be repaid. The plan’s assistance holdback amount will be reduced to $22,700.


32 But not before 2008, the year RDSPs became available.

Payments

Payments from an RDSP must start before the end of the year the beneficiary attains 60 years of age. Prior to 2014, the rules limited the minimum and maximum amount that could be withdrawn annually. The current rules provide greater flexibility for withdrawals from an RDSP after 2013.

Since the RDSP contributions are not deductible for tax purposes when they are made, they are not taxable when withdrawn. The investment income and the capital gains realized in the plan and the grants and bonds that have been put into the plan are taxable in the beneficiary’s hands when amounts are withdrawn from the plan.

End of plan

On the termination of the plan (e.g., the beneficiary ceases to qualify for the disability tax credit or dies), the funds in the RDSP are then paid to the beneficiary or his/her estate. The amount received, net of the contributions and any repayments, has to be included in the taxable income of the beneficiary for the year the amount is received or for the year of death.

Although the rules provide that a RDSP has to be terminated by the end of the year following the year the beneficiary ceases to qualify for the DTC, the plan may be able to remain open if a medical practitioner certifies that it is likely that the beneficiary will be eligible for the DTC again in the foreseeable future.

Rollover of RRSP/RRIF proceeds to an RDSP

Subject to certain limits, RRSP/RRIF proceeds can be rolled over to an RDSP for the benefit of the deceased’s financially dependent infirm child or grandchild. The rolled-over proceeds will reduce the beneficiary’s RDSP contribution room, but will not result in any CDSGs from the government.

Example: If you have an infirm financially dependent child or grandchild, you should consider if any changes need to be made, either in your will or by way of beneficiary designations, to accommodate this new rule.